The Caffè Nero CVA challenge in Young v Nero Holdings Ltd [2021] EWHC 2600 (Ch) was unusual in that, unlike previous challenges such as Lazari Properties 2 Ltd v New Look Retailers [2021] EWHC 1209 (Ch); [2021] PLSCS 96 and Carraway Guildford (Nominee A) Ltd v Regis UK Ltd [2021] EWHC 1294 (Ch), it was largely not focused on lease modifications and compromises imposed by the CVA itself. Instead, the decision dealt almost entirely with the process of the vote to approve the CVA.
What happened with Caffè Nero’s CVA?
In summary, an eleventh-hour offer was made to purchase Caffè Nero after the CVA had been proposed but before the creditors had finished voting on it. That offer asked the nominees appointed to oversee the CVA process to delay the vote by 10 business days so that its terms could be finalised and considered. Creditors were given notice of the offer, which included a term whereby the purchaser would pay all of Caffè Nero’s landlords’ arrears in full, rather than only 30% as the CVA proposed. The CVA proposal was amended to include an obligation to seek a sale on such terms, but only after more than two-thirds of creditors had voted on the original proposal.
A landlord challenged the CVA, primarily on the basis that the vote should have been postponed, as creditors had insufficient time or information to enable them to consider the offer.
The court rejected the challenge as it found that there was little else the nominees could have done: they acted in good faith in circumstances where they were under considerable time pressure. The only means to extend the vote would have been an application to court, the outcome of which was uncertain – and the delay could have put the CVA process in jeopardy. The court placed considerable emphasis on the timing of the offer and the constraints that the company was under. However, it is quite possible that (had the offer been made earlier) a decision not to postpone the vote would have been viewed differently.
What might this mean for restructuring plans?
The Corporate Insolvency and Governance Act 2020 introduced a new insolvency process called a restructuring plan, which was subsequently used by Virgin Active in a high-profile case to write off arrears and reduce rents: Re Virgin Active Holdings Ltd and others [2021] EWHC 1246 (Ch). While a similar attempt made by NCP appears to have been put on permanent hold, many expect restructuring plans to replace CVAs as tenants’ process of choice for restructuring their leasehold liabilities. The key difference with a restructuring plan is the ability to cram down dissenting classes of creditors who vote against it.
The tests for whether a CVA should be revoked or a restructuring plan refused sanction on the grounds of unfairness are similar. A fundamental question is whether the outcome for creditors in the event that the CVA or restructuring plan is not approved would be worse.
This is known as the “vertical comparator” in the context of CVAs and the “relevant alternative” when dealing with a restructuring plan. Where a CVA or restructuring plan is proposed, the company will, therefore, need to be prepared to present valuation and other evidence to show that creditors would be worse off if the proposal failed.
In common with Caffè Nero, there was some relatively late interest in buying NCP during the course of its restructuring plan proceedings. In fact, two offers were made to purchase NCP on terms, it was said, that would provide a far greater return for landlord creditors. This potentially undermined NCP’s case that the relevant alternative was an administration in which landlords would fare far worse.
The difference with NCP is that the offers, though late, were sufficiently in advance of the hearing to sanction the restructuring plan that the company could not simply dismiss them out of hand. At the same time, the moratorium against forfeiture and winding-up petitions to enforce rent arrears was extended to March 2022, making it more difficult for NCP to say that the restructuring plan had to be implemented immediately or else the company would collapse.
The sooner the better
We are likely to see more restructuring plans in future, given the availability of the so-called “cross-class cram down”. This is clearly a key factor in choosing restructuring plans where there are landlord creditors: in Virgin Active, the company gave evidence specifically that a restructuring plan was being pursued because a CVA was “likely to result in a blocking from the landlords”.
It will be interesting to see whether the decision in Caffè Nero has wider implications and is relied on by tenant companies proposing a restructuring plan on the basis that it offers a better outcome for creditors than the alternative. Keen to avoid the difficulties that befell NCP, they might argue that late offers should be disregarded as evidence of a potentially better outcome. The earlier an offer is made, and the more definitive it is, the harder this will be. The difficulty with restructuring plans, however, is that the company is often very reluctant to supply financial information, and a third party purchaser who is not a creditor is not entitled to it, but this is likely to be needed before any offer can be properly formulated.
Mathew Ditchburn is a partner and Joe Armstrong is an associate at Hogan Lovells International LLP
